Guides for a sea change

Most soon-to-be retirees won't know what they missed. They'll just know that life seems a lot more difficult for them than for their parents. They won't know exactly why. So let me tell you about a change that may help the surge of baby boomer retirees: the creation of a new specialty and professional designation, the Retirement Management Analyst, or RMA.

As recently as 1970, about 80 percent of all workers were covered by a pension plan. It was the Golden Age for American workers. They owned their homes. They had Social Security. And they had a shot at getting a monthly pension check from their former employer — for life.

There were problems with pension plans. Some were underfunded; they weren't a good solution for an increasingly mobile workforce; and some were structured to benefit the few rather than the many. But when defined-benefit pensions worked, they delivered a lifetime retirement income without requiring workers to save a dime or to make a single investment decision. It doesn't get much better.

Today, only about 30 percent of all workers are still covered by a pension plan. Instead, workers have another imperfect plan: a 401(k). Now, workers are expected to save part of their income and make investment choices that will grow their savings enough that they can create a healthy income when they retire.

That isn't easy. Saving doesn't come naturally, for one thing. And most people would rather volunteer for experimental root canal work than make investment choices. Too many people don't save enough. Others take too much, or too little, risk. That's why pessimists would be happy to scrap the entire defined-contribution plan idea.

In fact, DC plans are improving rapidly. Workers are automatically enrolled. Sometimes their contributions are automatically increased. And plan offerings are increasingly in the form of pre-built diversified portfolios, such as the target date funds that are constructed to change asset allocation as the worker approaches retirement.

Still better, costs are coming down fast. Today, major employers use low-cost index funds, with costs that run around one-tenth of 1 percent. These changes increase the probability that workers will have a nice nest egg when they retire.

Does this mean the problem of retirement income is solved? Sorry, no.

Defined-contribution plans only accumulate assets. What they don't do is create reliable retirement income. That leaves an army of retirees needing to find a way to squeeze spending cash out of whatever they have for savings. It's not a pretty picture.

One reason the situation is so ugly is that portfolio withdrawal rates are far more limited than pension payment rates.

Here's an example: Today, taking even 4 percent from a nest egg would require withdrawals of principal in addition to paying out dividends and interest. Yet a 65-year-old man can get a life annuity payment (the equivalent of a pension income) at 7.1 percent of cash invested. He even could get a payout rate slightly more than 6 percent for a joint life annuity with 100 percent to his surviving spouse. That's 50 to 75 percent more current income than you can safely take from your 401(k) accumulation.

To be sure, there are differences. The 4 percent nest egg withdrawal might rise with inflation. The principal likely would be left to heirs. The 6 percent or 7 percent from the same amount of money in a life annuity means no inflation adjustment. It also means no estate.

Navigating these decisions is really difficult.

But I found hope while attending a recent conference in Austin. Put on by the Retirement Income Industry Association, the two-day event showcased some of the research and efforts being made to solve the retirement income problem.

“This is an insurgency,” Francois Gadenne said at the opening. Gadenne is one of the founders and the executive director of the association. Talk about “insurgency” isn't the kind of language one expects from a financial guy opening a retirement conference, but he's absolutely right.

He quickly pointed out that financial service firms have focused almost exclusively on asset accumulation. No one really thought about what we accumulate those assets for: a regular income after the paychecks stop, the equivalent of a pension check.

That's why I find the mere existence of this association to be a sign of hope, another step toward solving the retirement income dilemma most workers now face with neither knowledge nor tools. The association also has created the curriculum for the Retirement Management Analyst. So far, about 100 people have earned the designation.

My bet: There will be a lot more.

Questions about personal finance and investments may be sent by email to scott@scottburns.com. Please visit www.assetbuilder.com to comment on any of his articles, to find referenced Web links or to discuss personal finance topics on his forums. Questions of general interest will be answered in future columns and on the website.